This Country Economic Memorandum reviews the significant changes Mozambique underwent in the last five years, specifying that to continue its rapid growth, and reduce its high levels of poverty, the country will need to adopt a new set of reforms. Such reforms, focused on increasing the profitability of agriculture, and promoting labor-intensive manufacturing activities, hold the best hope to move poverty into prosperity. Three factors - increased political stability, deep economic reforms, and foreign assistance - contributed to the positive developments. But the country still faces absolute poverty, particularly in rural areas, where infrastructure, and communications are lacking, aggravated by high illiteracy, and low life expectancy rates. Strengthening the macroeconomic environment will require a reform agenda, reducing the fiscal deficit by increasing tax revenues, while improving public spending. Moreover, the country's external position continues to be vulnerable, thus the external balance needs to be strengthened. Therefore, infrastructure recovery, namely roads, would facilitate rural trade, as will alternative mechanisms not based on trade restrictions, to address food security concerns, and promote improvements in productivity. Strategic actions to prod private sector development, and increase flexibility in the labor market should be decisive, to enhance as well education, and health.